During 2014 Irish real estate was the global leader in investment performance as a dramatic recovery took hold.
This year continued to be impressive on an international scale, but with returns moderating as the market stabilises following turbulent good and bad years. Now the market has firmly switched into a growth phase, with occupier demand in a buoyant economy driving the investment performance of commercial real estate.
MSCI data indicates that the Irish market returned an incredible 40 per cent to investors in 2014, as yields bounced back forcing a major repricing in capital values and this in turn pushed total returns higher. The performance was Dublin-centric. Encouragingly, 2015 saw improvements spread nationwide, as investor confidence returned for regional assets and investors chased value outside of the capital.
The Irish market, despite its growing international appeal, is small. Size limits the liquidity of a market, and crucially also its accessibility. Consequently, the 40 per cent returns in 2014 had limited effect on the attitudes of global investors. However, the growth of the listed sector in Ireland since 2013, especially the REITs, has opened the market up further to a broader mix of investors, who want to gain quick exposure to this performance. Despite this improved accessibility, direct investors will tend to focus on Dublin as the only liquid market with an accessible scale.
Investors with exposure to Dublin have been rewarded. Those who bought close to the bottom of the market in 2013 have seen average asset values rise by a cumulative 63 per cent, and rents rise by 42 per cent leading to a potential total return of 94 per cent.
Despite these striking numbers, average values are still over 45 per cent from the 2007 peak, having declined by as much as 70 per cent at the market’s lowest ebb.
The Dublin office sector lead the recovery, which began in docklands, and rental value growth has continued to strengthen in these markets. This year has, however, seen a resurgent retail sector, with prime shopping streets, like Grafton Street and Henry Street, making major gains.
The retail sector had lagged significantly behind the office sector for much of the recovery, but with growing consumer confidence, improvements have been witnessed across Ireland in 2015. Prime locations have dominated the performance charts, but regional markets recorded positive capital value and rental growth. Grafton Street stands out with a total return of 31 per cent over the last 12 months as rising demand from retailers to secure space on Ireland’s prime pitch saw average rents rise 13 per cent.
While standard high street shops in Dublin city centre witnessed increased occupier demand, national shopping centres struggled with rents largely unchanged so far in 2015. Some key Dublin centres are an exception to this with strong lettings performances for popular locations. Notably, the entire shopping centre market has been buoyed by recent transactions and this has provided some pricing certainty for investors as yields compress. The strengthening yield figures boosted total returns for shopping centres, which have posted a total return of 22 per cent in the 12 months to Q3 2015 on the back of capital growth of 14 per cent.
Ireland will now be closely watched from a risk management perspective during the general election period. Retaining the current economic trajectory will be essential to allaying investor concerns. Fears around a Greek or Portuguese style election outcome will play heavily on the minds of anyone allocating capital to a market that is relatively small and, as a result, less liquid than the home markets of these investors.
Despite the expected uncertainty surrounding a general election, the prospects for the Irish market are favourable for 2016. The cycle is shaping up very differently to the 2006/’07 period, with a positive occupier market starting to drive performance through rental growth, rather than investor driven speculation that dominated the previous boom. The Irish fundamentals are strong, but to maintain momentum stability is crucial. No investor likes uncertainty.
Colm Lauder is senior associate with London-based researcher MSCI
